IIF Proposes Greek Debt Exchange for 30-Year Bonds: Report

Published July 21, 2011

Reuters

The Institute of International Finance has proposed an exchange of Greek debt maturing until the end of 2019 for 30-year paper, which would give a 17-billion euro ($24-billion) net private sector contribution to the next Greek bailout, a document obtained by Reuters showed on Thursday.

Euro zone leaders are meeting on Thursday to discuss ways in which private Greek bondholders can be involved in the second financing package for Greece, which is to come on top of the 110 billion euro bailout agreed with Athens last year.

One of the options under discussion is the proposal from the IIF, which groups together more than 400 of the world's biggest banks.

The euro zone document, dated July 20, said Greek financing needs until mid-2014 were 173 billion euros, of which Greek privatisation revenues would cover 28 billion and the remainder of the first bailout would give another 57 billion euros.

Private investors now hold some 150 billion euros worth of Greek bonds, the document said.
Under the proposal of the IIF and on the assumption of a 90 percent participation rate, the bond swap to 30-year paper could therefore involve 135 billion euros worth of Greek debt, increasing the average Greek debt maturity to 19.78 years from the current 6.87 years.

The IIF proposal envisages an upfront debt exchange at par of 45 billion euros of debt, an upfront debt exchange at a 10 percent discount of another 45 billion and another 45 billion of debt exchanged when bonds mature.

For bonds exchanged upfront at par and at maturity, the coupon would be 5.25 percent, while for bonds exchanged upfront under a 10 percent discount, the coupon would be 6.16 percent, the document said.

The debt exchange programme would be accompanied by a debt buyback programme, for which the IIF would like the euro zone, the IMF and maybe third countries with external surpluses to dedicate some 30 billion euros.

The IIF whole debt exchange plan would deliver a net financing contribution from the private sector of 91 billion euros, but during the next three year bailout, until mid-2014, the plan would contribute 52 billion euros, the document said.

This would leave 36 billion euros to be provided by the euro zone and the IMF in that period.
"The maturity extension on existing bonds is offered in return for a credit enhancement from the official sector, whereby the full principal for new bonds exchanged or committed under the proposal would be guaranteed through AAA quality zero-coupon bonds," the document said.

The European Commission estimates the credit enhancement at 30.4 billion euros, the document said. Another 5 billion euros could be the euro zone contribution to the debt buyback.

This would put the real net contribution of the private sector to the second Greek bailout at about 17 billion euros, the document said, leaving 71 billion euros to be provided by the euro zone and the IMF.

"This option would almost certainly result in Greece entering selective default and so would require a mechanism to assure access to Eurosystem liquidity operations for Greek banks," the document said.

The document said the cost of such a mechanism was likely to be between 25 billion and 35 billion euros, but it would only need to be in place for the time Greece was in selective default.

The document estimated the total amount needed for Greek bank recapitalisation would be some 25 billion euros, or 15 billion more than the 10 billion already allotted for that purpose in the first Greek bailout from last year.